Banking sector
Maintain neutral: The higher minimum capital standards announced on Sept 12 are milder than expected. Malaysian banks have no issue in meeting the 4.5% common equity requirement by January 2015, and the 7% by January 2019. Dividend reinvestment plans, continuous profitability, and the shift in the assets mix towards lower risk and risk-free assets will strengthen capital ratios further. For now, equity raising exercises seem off the hook, while existing dividend payouts may be reviewed.

The package of reforms will see: (i) common equity requirement being raised from the present 2% to 4.5% by January 2015; (ii) a 2.5% phase-in capital conservation buffer from Jan 2016 (new), bringing the total common equity requirement to 7% by January 2019; and (iii) Tier 1 capital being raised from 4% to 6% by January 2015. The total capital requirement remains at 8%. Deductions for non-consolidated investments in financial institutions and deferred tax assets from timing differences (referred to as "regulatory adjustments") for combined amounts above 15% of common equity will be phased in at 20% in January 2014, and to reach 100% by January 2018.

The Sept 12 reforms are a milder version of the original December 2009 proposal. While the minimum common equity ratio was not mentioned earlier, speculation is that it will range up to a high 8%. In addition, the original proposal was for a full deduction of "regulatory adjustments" from the common equity calculation from day zero. This would have impacted Maybank, whose investments in MCB and An Binh Bank comprise 1.3% of total capital, and Hong Leong Bank whose investment in Bank of Chengdu comprises 2.9%. Instead, the deductions are now phased in, starting at 20% in January 2014.

Common equity ratios for Malaysian banking groups ranged between 7.4% (Public) to 14.8% (Hong Leong) as at June, according to our calculations based on Basel definitions. Tier 1 capital ratios ranged between 10% (AMMB) and 15.6% (Hong Leong), as disclosed by the banks. Malaysian banks have thus already met the minimum 4.5% common equity requirement. By 2019, Malaysian banks' common equity ratios will be strengthened even further by gradual retained profit accumulations.

The biggest "winners" are Maybank, Public Bank and AMMB which have the lowest common equity ratios among the peers - but their ratios have turned out to be higher than Basel III's minimum requirements. The concerns on equity raising exercises for the banks have abated while dividend payout policies, which have been put under review, may be reviewed in the coming months, weighted against the respective banks' expansion plans. We think that Public Bank may be able to raise its 50% to 55% dividend payout guidance, which implies 4.9% gross yield for 2010 at current levels. Our "buys" are RHB and AMMB. - Maybank IB Research, Sept 14